The Swiss Federal Council on 27 September 2019 issued additional guidelines on a proposed reform of the Swiss withholding tax and Swiss stamp tax regimes.
The proposal reform measures would introduce a new withholding tax on interest based on the “Swiss paying agent” principle and an exemption from Swiss stamp tax for transactions with debt securities issued by Swiss entities.
The primary purpose of the proposal for an exemption from withholding tax on certain interest payments would be to strengthen the Swiss debt capital market by enabling Swiss companies to raise debt capital out of Switzerland without incurring withholding tax (currently Swiss companies are seen as having a competitive disadvantage because the Swiss withholding tax “leakage” on interest paid to Swiss and foreign investors).
Under the proposal, an exemption from Swiss withholding tax would be introduced for interest payments made by Swiss companies to Swiss resident corporate investors and all foreign resident investors. However, the existing withholding tax (imposed at a rate of 35%) would remain applicable on interest paid to Swiss resident individuals.
In addition, it is proposed that Swiss withholding tax would be expanded to include all interest-bearing investments held by Swiss resident individual investors through an account at a Swiss bank (i.e., on foreign securities). The responsibility to account for and pay the 35% withholding tax would rest with the Swiss paying agent involved in the transaction (typically the Swiss bank).
As a result of this proposed regime, a significant proportion of Swiss resident individual investors could experience cash flow disadvantages and increased administrative burden.
The introduction of a paying agent system would also raise numerous practical issues for Swiss financial institutions. For example, Swiss banks would have to calculate the income components embedded in all structured products and units in funds (including alternative investments) and account for and pay withholding tax to the Swiss tax authorities, probably even if the product or the fund does not make any distributions.
The introduction of a paying agent system would require significant investment in the development of new IT systems, while possibly also exposing Swiss banks to considerable tax risks.
The proposal includes an additional exemption from Swiss stamp tax for transactions with Swiss debt instruments (i.e., to encourage foreign debt investment into Switzerland). This would not be the end of the Swiss stamp tax.
Swiss securities dealers (mainly Swiss banks) would still have to deal with Swiss stamp tax on any taxable transactions with Swiss non-debt securities and foreign securities, and therefore would have to continue to maintain appropriate systems to properly account for and pay Swiss stamp tax.
This is viewed as an unexpected proposition, especially in an environment when many jurisdictions have introduced (or are talking about introducing) some form of financial transaction tax system.
The proposal is not expected to be implemented without further amendments because: (1) the introduction of a Swiss paying agent system for withholding tax does not make much sense in the current environment of tax transparency, exchange of information and negative interest rates; and (2) the exemption from Swiss stamp tax on Swiss debt securities would very likely be challenged as being an unacceptable gift.
Read an October 2019 report prepared by the KPMG member firm in Switzerland
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